Garuda Indonesia Business Information, Profile, and History

Company Perspectives:

We have long been a driving force behind the remarkable development of tourism in Indonesia. Additionally, we are providing access from major overseas markets to all parts of the archipelago, simulating travel through vigorous promotion and pioneering development of tourist facilities. We support the government's objectives for national development through our flight routes, hotel and tourism subsidiaries. Dedicated employees who are determined to see the company evolve into a major Asian airline support us. The performance of Garuda now shows that not only has management successfully rescued and revived the airline, it has also discovered the right concept needed to manage the company.

History of Garuda Indonesia

Garuda Indonesia is a major international and domestic airline that has been the flagship of Indonesia's airways for more than 50 years. As a state-owned company, Garuda's fortunes have always been entwined with the nation's as a whole, and economic development has always been a part of its mission. Aviation is a vital mode of transport for the archipelago nation made up of 1,700 islands. Garuda flies about six million passengers a year.

Origins

Although Indonesia proclaimed itself an independent republic in 1945, the nation continued to struggle with the Dutch until 1949. In October 1948, shortly before world recognition of Indonesia's independence, Garuda began humbly when a team of Indonesian Air Force officers purchased a single DC-3 Dakota from Singapore. The airline launched its maiden flight from Calcutta to Rangoon in January 1949. Named for a mythical Indonesian bird who saves a maiden from death, Garuda was charged by the government with fostering the nation's economic growth.

Development of an efficient air travel industry in Indonesia was crucial because of the country's unique geographic situation. Indonesia is the world's largest archipelago, stretching for more than 3,100 miles and comprising a series of more than 17,508 Southeast Asian islands, including Bali and Java. Nearly 6,000 of the islands are inhabited by a diverse ethnic population totaling over 170 million, and Garuda has acted as a domestic air link for the nation. In addition, Garuda's establishment of international flight routes has been partly responsible for developing the national tourism industry since the 1980s, when Indonesia began turning its focus away from the petroleum trade after the oil glut of that decade and sought to cultivate tourism as an alternative means of income.

In the early 1980s, Garuda began transferring domestic routes to one of its subsidiaries, Merpati Nusantara Airlines, also wholly owned by the government. Merpati served the well-established domestic routes and was also responsible for "pioneer" flights--providing links between smaller, less-developed cities and larger ones--in an effort to promote national expansion and efficient utilization of natural resources. Although many pioneer flights were forced to land on primitive dirt or grass runways, these trips were considered part of Merpati's mission as a state-owned company. With nearly 60 percent of its destinations classified as pioneer service, Merpati devoted about one-third of its fleet to these efforts. In return, the government provided subsidies for pioneer flights to make them more profitable.

International Focus in 1984

A massive reorganization in 1984 led to substantial growth in Garuda's international service as the company sought to position itself as a large-carrier-only airline. Although the airline had achieved international recognition as a major carrier, it was $1.3 billion in debt and suffering a corporate identity crisis. Its plans called for a new-aircraft purchase program, company-wide employee training, corporate development and expansion, and a new marketing strategy to build on its international position. Under new management, Garuda implemented its four-pronged attack and created a new logo and new uniforms to update its corporate image.

Under a fleet upgrade and expansion plan to take the company into the year 2000, the airline began ordering new aircraft. Indonesia's increasing deregulation of the industry in the late 1980s freed purchase decisions from government influence; former Garuda Indonesia president Moehamad Soeparno told an interviewer for Aviation Week & Space Technology that he "requested the freedom [from the government] to choose our own aircraft so we can operate in a professional manner." The company hired an outside consultant to advise management on the most appropriate mix of aircraft to meet their needs. The modernization included plans to add nine Boeing 747-400s by 1996 and to refurbish several of its existing large jets. Despite the modernization plan's $4 billion price tag, Garuda had managed to reduce its $1.3 billion debt to $260 million by the end of the decade.

In 1989, with the increasing deregulation of the airline industry, Garuda also accelerated its transfer of domestic routes to its subsidiary. Before that time, no airline besides Garuda Indonesia--including Merpati--was allowed to operate jet aircraft. Merpati's departures and passengers were expected to double by the time the transfer was completed, and the company's revenues were projected to increase by 200 percent. Such rapid growth was not absorbed easily, however. Merpati was forced to borrow pilots and technicians from its parent company until an overall staff increase of 50 percent could be achieved.

Expanding in the Early 1990s

The Garuda Indonesia overhaul paid off in sales and growth for the airline in the early 1990s. With a fleet of 75 of its own planes and several others leased to meet route demands, Garuda expanded its service to include 16 domestic destinations and 37 international cities on five continents. Market research for Garuda indicated that European travel to Indonesia was likely to increase six-fold by the year 2000. In a sales mission led by new president Wage Mulyono, appointed in January 1992, Garuda explored European options and added Munich to its list of destinations. According to the airline's research, Germany represented one of Indonesia's highest-yield markets for tourism; 20 percent of Germany's trade volume with the Association of Southeastern Asian Nations (ASEAN) was absorbed by Indonesia, and Germany ranked second behind only the United Kingdom in visitors to Indonesia. By adding a second German destination to its schedule (Frankfurt was established in 1965), Garuda predicted that Germany would eventually become the single largest source of tourists to Indonesia. Future plans included expansion of routes to Houston, Montreal, and Vancouver.

While Garuda Indonesia aggressively pursued foreign markets, it continued to serve domestic passengers with its own routes or those of its Merpati subsidiary. One of the most important air services the carrier offered each year took the form of flights during hajj, the annual Muslim pilgrimage to Mecca. Among Indonesia's 300 ethnic groups is a large Islamic population for whom the journey to Mecca during hajj season is critical. Garuda served the needs of Indonesia's Muslim community with flights that were challenging yet lucrative for the carrier. According to Aviation Week & Space Technology, hajj flights--which take place during a compressed two-month period determined by the Muslim calendar--have made up as much as 10 percent of the company's annual revenues. The challenge for Garuda was to maintain its regular service on established routes and also to meet the demands of inflexible hajj-flight scheduling, since all hajj passengers had to arrive before the annual pilgrimage began. Scheduled as frequently as every hour, flights to Mecca were full on arrival and empty on the return flight; after the pilgrimage, the pattern was reversed. The airline also made special customer-service arrangements during this period, including a pre-flight passenger briefing in several dialects for those who had never flown before and seat assignments by area of origin. By leasing extra aircraft and entering cooperative agreements with charters, Garuda transported an estimated 80,000 hajj passengers per season in the late 1980s and early 1990s.

Early in its history, Garuda Indonesia had sought assistance from established airlines and joined commercial associations to gain training and expertise. As it entered the 1990s, Garuda had grown so much in both size and expertise that it was a model airline for other growing carriers in the Asian region. The airline built the Garuda Indonesia Training Centre to provide complete training for all airline operations, including flight crew, engineering, maintenance, traffic, in-flight service, and sales. The center also included a modern language laboratory to facilitate communication with international customers. Using the center as a training ground for its large numbers of Indonesian-recruited employees, Garuda also opened the facility to other carriers--such as Finnair, Malaysia Airlines, Korean Air, and Philippine Airlines--to share its mastery of high maintenance and service standards. With these extensive facilities, including the largest hangar in the world, Garuda also began bidding for maintenance contracts with other airlines. In addition to building a state-of-the-art training center, Garuda enhanced its customer service with a central computer-based booking system in 1988. The system linked Garuda offices and those of its subsidiaries in more than 80 cities around the world. In early 1992, Garuda began considering purchasing part interest in two Australian airlines, Qantas and Australian Airlines.

As the parent company of a major group that included accommodations and tourism as well as air transport, Garuda's diversity in the early 1990s continued to fulfill its mission of economic development and expansion for Indonesia. The company co-sponsored a Visit Indonesia 1991 campaign that was predicted to double tourist arrivals to 2.5 million by 1993. Through its subsidiaries, Garuda also began to market controlled, environmentally conscious vacations to Indonesia's unspoiled natural areas. Mulyono elaborated upon the link between company and national goals in the airline's in-flight magazine: "It is our policy, as Indonesia's national carrier, to be involved in the total travel experience to the benefit of visitors to our country and to contribute to the foreign exchange earnings which are so important in improving the national infrastructure. This will also be beneficial to visitors as these earnings will be used to improve road, rail, and telephone services which are badly needed to boost the overall communications system."

Trouble in the Mid-1990s

Rising fuel and maintenance costs led to losses of Rp342.79 billion in 1995 and Rp87.44 billion in 1996. At the same time, Garuda was trying to expand. Heeding calls for more cargo capacity, the airline made arrangements to double its long-haul fleet with a $1.6 billion order for 23 Boeing airliners in 1996. Most of this would be cancelled; after the Asian financial crisis, Garuda would instead bolster air freight capacity through marketing deals with Korean Air, Martinair, China Airlines, and Air France.

The government was planning to partially privatize the airline through an initial public offering (IPO), which was originally scheduled for 1997 and put off until 1998. To prepare for the IPO, Garuda began to sell off non-core units. Its two hotels, managed by the PT Aerowisata subsidiary, were sold in April 1997.

Garuda was hit hard by the Asian financial crisis of 1997-98. It suffered both from unfavorable currency valuations (most of its costs were in U.S. dollars) and from a falloff in tourism. To survive, the airline sold off 20 planes, cancelled orders, and closed money-losing routes, including all those to the United States. Layoffs were put off until the fall of 1998; 3,000 of 13,000 employees were cut. Fares were also raised. Still, the crisis left Garuda with a debt of $1.8 billion. New management was installed in November 1998, and the new team was able to restore profitability within a year. The airline was seen as a model of recovery.

In 1999, Garuda saw its first profit in a decade, Rp548 billion ($62 million). The airline was flying about six million passengers a year. It posted sales of 9.279 trillion rupiah in 2000, up from 7.541 trillion the previous year. Net profit was Rp77.9 billion. Garuda began to reopen some of the 17 international routes that had been closed in the wake of the Asian financial crisis and secured a leasing deal for seven Boeing 737s to replace lost capacity.

The Asian financial crisis cut domestic passenger counts (and airline fleets) in half and grounded one local carrier, Sempati Air. The Indonesian government responded by deregulating the air market. A half-dozen start-up airlines appeared in the domestic market in 2000 and 2001, adding to the handful of established airlines.

After the September 11, 2001 terrorist attacks on the United States, some European governments issued travel advisories warning tourists to avoid Indonesia, which was home to some small but highly vocal radical Islamic groups. However, Garuda was able to hold on to profitability. It posted a profit of $60 million (Rp503 billion) in 2002 on sales of about $5.6 billion.

Plans for privatization were still alive, though deferred till 2003. In August 2003, Garuda announced plans to spin off its maintenance business, with 2,750 related employees, as well as other non-core units, as part of the privatization preparations.

More Challenges in the 2000s

After a couple of years of a promising recovery from the Asian financial crisis, Garuda ran at a loss in the first half of 2003 as the worldwide travel industry suffered from bombings in Bali, the SARS epidemic, and the war in Iraq. At the same time, Garuda was experiencing relentless price competition at home from a crop of nearly two dozen "bare bones" domestic airlines, reported Britain's Financial Times. Garuda controlled about 50 percent of the domestic market, though its operating margins had been cut in half. The domestic market was expanding but had yet to return to pre-1996 levels.

In September 2003, Garuda began a marketing arrangement with Malaysian Airline System Bhd (MAS) that effectively established the Malaysian capital of Kuala Lumpur (KL) as an external hub for Garuda's long-haul international operations. In other parts of the deal, the carriers were working together to increase traffic between KL and Jakarta and hoped to eventually share aircraft maintenance and information technology resources.

Principal Subsidiaries: PT Aerowisata; PT Abacus Distribution System Indonesia (95%); PT Capura Angkasa (60%).

Principal Competitors: Lion Air; Singapore Airlines Ltd.; Thai Airways; Malaysian Airline System Ltd.

Chronology

• Key Dates:
• 1949: Garuda begins operations with a single DC-3 flying Calcutta-Rangoon.
• 1984: Massive reorganizations orients Garuda toward an international market.
• 1998: New management is installed to cope with disastrous effects of Asian financial crisis.
• 2000: Deregulation greatly increases competition in the domestic market.
• 2003: Bali bombings, SARS, and Iraq war endanger Garuda's recovery.